Friday, May 18, 2012

Gulfport Energy and Wexford Capital: Part 2

The very long set of transactions entered into by Gulfport Energy with Wexford Capital was surprising to me as well as to a couple of readers.

One question though was (and I am paraphrasing): are these transactions large with respect to Gulfport Energy? Is that the reason you are short?

I can answer the first question simply: yes - related party transactions are important in Gulfport. That is easily seen by looking at their assets as mapped on their home page:

The company has interests in the Canadian Oil Sands, the Niobrara Shale, Thailand, the Permian Basin, Southern Louisiana and the Utica Shale.

Lets go through them individually.

The Canadian Oil Sands operations are held through Grizzly Oil Sands. The proxy tells us that Gulfport own a "24.9999% interest in Grizzly, a Canadian unlimited liability company, through our wholly owned subsidiary Grizzly Holdings, Inc. The remaining interests in Grizzly are owned by other entities controlled by Wexford."

The Niobrara Shale is "effective April 1, 2010 ... an area of mutual interest agreement with Windsor Niobrara LLC, which we refer to as Windsor Niobrara, to jointly acquire oil and gas leases on certain lands located in Northwest Colorado for the purpose of exploring, exploiting and producing oil and gas from the Niobrara Formation." That agreement provides that each party must offer the other party the right to participate in such acquisitions on a 50/50 basis. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement." Gulfport is "the operator" of the Nobrara acreage - but the partner - Windson Niobrara is controlled by Wexford.

The Thailand assets are in two parts - Tatex Thailand II and Tatex Thailand III.

Gulfport have a 23.5% ownership interest in Tatex Thailand II, LLC. The remaining interests in Tatex II are owned by other entities controlled by Wexford.

Gulfport have a 17.9% ownership interest in Tatex III. Approximately 68.7% of the remaining interests in Tatex III are owned by other entities and individuals affiliated with Wexford.

Windsor, an entity controlled by Wexford, is the operator of all Gulfport's assets in the Permian Basin.

The Permian Basin Assets were (at year end) subject to an agreement with Windsor which provides that each party must offer the other party the right to participate in 50% of each such acquisition. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement.

In other words Windsor owned 50 percent of these and operated them. There is an interesting post-year end transaction which may be the subject of another blog post.

The Southern Louisiana assets (known as West Cote and Hackberry) are not owned by Wexford but Wexford entities provide barging, drilling and pressure control services.

The Utica Shale assets are operated by Gulfport but like the Niobrara and Permian assets they are subject to a 50-50 sharing agreement with a Wexford controlled entity.

In other words Wexford is integral to the running or ownership or both of every asset controlled by Gulfport. The Chairman of Gulfport (Mike Lidell) cements this link. He is the operating member and in some cases an officer of many of the Wexford entities.

Wexford knows more than anyone else about this company

As we have shown Wexford is either a major owner or operator or supplier to every Gulfport Asset. The Chairman of Gulfport is also (at least in part) a Wexford man.

Wexford is a big fund - according to its website it has $5.6 billion under management.

It is worth knowing what Wexford is doing with their stake. The answer is selling. And selling. And selling some more:

Trade Date

Symbol

Company Name (Issuer)

Trade Type

Shares

Price ($)

Value ($)

2012-03-13

GPOR

Gulfport Energy Corp

Sale

245,000

32.80

8,035,020

2012-03-08

GPOR

Gulfport Energy Corp

Sale

329,670

32.53

10,723,835

2012-03-09

GPOR

Gulfport Energy Corp

Sale

370,422

33.17

12,285,416

2012-03-12

GPOR

Gulfport Energy Corp

Sale

150,000

32.43

4,864,200

2012-03-07

GPOR

Gulfport Energy Corp

Sale

381,968

32.32

12,347,115

2012-03-06

GPOR

Gulfport Energy Corp

Sale

50,000

31.23

1,561,700

2012-03-05

GPOR

Gulfport Energy Corp

Sale

59,000

32.18

1,898,797

2012-02-29

GPOR

Gulfport Energy Corp

Sale

17,000

34.50

586,585

2012-03-02

GPOR

Gulfport Energy Corp

Sale

17,200

33.75

580,534

2012-03-01

GPOR

Gulfport Energy Corp

Sale

459,000

34.11

15,657,408

2011-12-05

GPOR

Gulfport Energy Corp

Sale

1,150,000

27.84

32,016,000

2011-03-30

GPOR

Gulfport Energy Corp

Sale

2,760,000

30.56

84,345,600

2010-12-17

GPOR

Gulfport Energy Corp

Sale

3,910,000

19.40

75,854,000

Still they have 5.3 million shares left - and these have a not-inconsiderable value. Moreover almost all the sales have been at prices far above the current price. Their ownership position (including capital raises) has far more than halved.

I take a highly knowledgeable and very rich seller selling aggressively at prices around $30 as a good sell signal at prices around $30.

It is less good a sell signal where we are currently trading (at prices around $20). The reasons I am still short will need to wait for another post.

Could it by chance have something to do with the fact that 50 employees manage operations in three countries built up of more than 19m boe in reserves, generate 230m in sales and 110m (a not so shabby 48% margin)in operating earnings, while allocating almost 290m in capital expenditures? That's what I call a day's work.

SUMMARY- Biggest shareholder is the CIO at Wexford Capital. Next biggest shareholder is around 5-6%. Given the association of Wexford Capital and Gulfport, recent investment in Utica, he would want to maintain a stake as the largest shareholder. He had been selling out his private position in the company in March in the $30’s. - The continued investments from Wexford Capital in assets that have much more time to be monetized (at least 3-4 years) also point to the fact about quality of operations of GPOR. The financial oversight/expertise from association with a PE should be a plus at the least. - JV’s with PE are a common practice in oil and gas industry. And one can expect the same in the future too (as has been in the history). A quick example of another highly reputable company that comes into mind is CRZO. All these transactions are appropriately disclosed in the SEC filings.- Utica has much more potential, both from returns and scale perspective than any other similar GPOR asset. So it makes sense to divert the capital from other assets to Utica. Risk of dry holes is less in shales. - Based on worst case (hard) asset valuation (min. $1.2 to $1.5B), discount on multiple of being associated with PE operators, no debt, exposure to high LLS pricing, >90% oil exposure, existing cash generating assets, catalysts from Utica on the horizon in the next couple of quarters, and so on the stock is being beaten unfairly along with plummeting crude prices.

DETAILED ANALYSISThe fact of the matter is Gulfport is a company that has significant influence/relationship of Wexford Capital and it will probably remain the same for quite some time. While it can be construed as a negative for short period of time as the recent one, over long time their vested interest is beneficial for Gulfport.

Wexford Capital and PE ownership in oil and gas:Coming to the point about PE ownership in an oil and gas business, there are many examples of oil and gas companies that have PE ownership. The reason is that it is a capital intensive business. The value of capital is more so appreciated when everyone in the relevant media to the streets knows and talks about the shale discoveries in the US. How do smaller E&P operators acquire that capital to go into a resource play like a shale? It is by having relationships with capital markets, private capital providers and bye having knowledgeable operators/geologists/petro physicists in your team that help enter into a new territory and make the whole thing work. So many smaller companies in the need for capital and growth collaborate with private equity players who have higher risk tolerances compared to banks, etc. Moreover, with the growth ahead in shales, one would think that many PE’s redirect their capital toward this area. One can think of a couple of large publicly listed PE players who are doing this. Also, it is important to understand how an oil and gas company obtains loans from banks. It is based on the PDP. Or for a resource play it is based on delineating the play, being present there and starting to produce, etc. (look at KOG for an eg.). Also, very important is the fact that how big a player you become in a play. The more acres you can get hold of, it is more beneficial for you as a company to be able to have some say (or more negotiating power, etc.) over gas gathering/pipeline/sand companies. Plus the future capex requirement is also shared. From all these perspectives, if we look at GPOR’s arrangement with Wexford in Utica, it will make much more business sense than a headline association of its venture being with Wexford again.

DETAILED ANALYSISThe fact of the matter is Gulfport is a company that has significant influence/relationship of Wexford Capital and it will probably remain the same for quite some time. While it can be construed as a negative for short period of time as the recent one, over long time their vested interest is beneficial for Gulfport.

Wexford Capital and PE ownership in oil and gas:Coming to the point about PE ownership in an oil and gas business, there are many examples of oil and gas companies that have PE ownership. The reason is that it is a capital intensive business. The value of capital is more so appreciated when everyone in the relevant media to the streets knows and talks about the shale discoveries in the US. How do smaller E&P operators acquire that capital to go into a resource play like a shale? It is by having relationships with capital markets, private capital providers and bye having knowledgeable operators/geologists/petro physicists in your team that help enter into a new territory and make the whole thing work. So many smaller companies in the need for capital and growth collaborate with private equity players who have higher risk tolerances compared to banks, etc. Moreover, with the growth ahead in shales, one would think that many PE’s redirect their capital toward this area. One can think of a couple of large publicly listed PE players who are doing this. Also, it is important to understand how an oil and gas company obtains loans from banks. It is based on the PDP. Or for a resource play it is based on delineating the play, being present there and starting to produce, etc. (look at KOG for an eg.). Also, very important is the fact that how big a player you become in a play. The more acres you can get hold of, it is more beneficial for you as a company to be able to have some say (or more negotiating power, etc.) over gas gathering/pipeline/sand companies. Plus the future capex requirement is also shared. From all these perspectives, if we look at GPOR’s arrangement with Wexford in Utica, it will make much more business sense than a headline association of its venture being with Wexford again.

Now if we just put ourselves in a company management’s shoes. Our primary aim is to operate efficiently, generate good ROE (using no leverage is a big plus where many companies don’t do this), and continue to grow your future earnings stream, etc. Now if we think of running an oil and gas capital intensive business, to grow we need capital. We know banks will be hesitant, probably a bit inefficient in the entire process relative to other capital sources, etc. We know that we have working relationships with a PE firm that also has focus here. What would you be inclined to do? I think the answer is quite obvious and that is specifically what GPOR has had. Yes, agreed there can be a case where there has been no other affiliation, one answer is that both parties are comfortable with the opportunity set each brings along. But to look deep into this we should look at the margins (SG&A, etc.). Gulfport’s margins have been in most cases ahead of the industry average if not leading (partially because of the high LLS premium cushion). The same argument holds true for Wexford Capital drilling, etc. companies working at GPOR’s Louisiana assets. Think drilling, completion, etc. are not highly differentiated/technology oriented jobs. So till the time margins are fine, one can think of such a mutually beneficial business setting. Netherland Sewell, industry leading third party reserve analysis firm is the evaluator for GPOR’s Louisiana assets.

Largest shareholder and Chairman of Board:Charles Davidson has private ownership of the shares. Wexford Capital does not own any shares of Gulfport directly.• March 5th 2012: Charles Davidson had 6.431618 shares or 11.56% through CD holding company. Information set forth below is on the basis of 55,621,371 shares of common stock issued and outstanding, as reported in the Company’s Form 10K filed February 27, 2012.http://www.sec.gov/Archives/edgar/data/874499/000104846212000011/formsc13g.htm• From Gulfport’s 8k: Diamondback, Windsor Permian and DB Holdings are entities controlled by Wexford Capital LP (“Wexford”). Charles E. Davidson, the Chairman and Chief Investment Officer of Wexford, beneficially owned approximately 9.5% of Gulfport’s outstanding common stock as of March 13, 2012. Mike Liddell, Gulfport’s Chairman of the Board and a director of Gulfport, currently serves as the operating member and chairman of Windsor Permian and has an interest in DB Holdings.

Mike Liddell, who is the chairman of the board co-founded DLB Oil & Gas back in 1990’s along with Charles Davidson. Mike, Mark and Charles together owned 75% of the company and sold the company to $150M to Chesapeake back in 1997. That is quite impressive, giving some emphasis to the fact that they know how to run an oil and gas business. Also, helps understand that they know each other for over 20 years now. Mike Liddell was GPOR’s CEO till 2005.

PE ownership and JV’s example in oil and gas – CRZO:Again to mention the point of PE ownership in O&G firm assets, there are numerous examples but the most recent ones and one of the best and conservative management teams in the industry CRZO comes to mind. It is a company with assets in Marcellus, Utica, Eagleford. If we look through their presentation page 11, we can find the evidence of all JV’s. JV’s with Avista Capital appear multiple times. JV in Utica is more unique with the fact that Avista is 90% owner yet CRZO is the operator. Moreover, Avista’s Steve Webster is the Chairman of Board, owns more than 5% of company’s shares, and is the co-founder/co-managing partner/co-CEO at Avista Capital. All I know of is that CRZO is a very good company with excellent management team and good asset base. CRZO has quite a lot of leverage, and gas weighted assets, which is unlike GPOR.http://www.crzo.net/uploads/3-26-12%20Carrizo%20Howard%20Weil.pdfThe fact that GPOR discloses all the relationships in public domain in all the filings is what is required by law and it is abiding by it (unless someone has some “specific” case/scenario/example to point out).

Annual Meeting: Annual meeting of stockholders is on Jun 7 2012 in Oklahama City, OK. We can find this information in the proxies. All shareholders can go there or send their votes by mail. Below is the link to the proxy also available on GPOR’s website.http://www.sec.gov/Archives/edgar/data/874499/000119312512196642/d337122ddef14a.htm

Now if we just put ourselves in a company management’s shoes. Our primary aim is to operate efficiently, generate good ROE (using no leverage is a big plus where many companies don’t do this), and continue to grow your future earnings stream, etc. Now if we think of running an oil and gas capital intensive business, to grow we need capital. We know banks will be hesitant, probably a bit inefficient in the entire process relative to other capital sources, etc. We know that we have working relationships with a PE firm that also has focus here. What would you be inclined to do? I think the answer is quite obvious and that is specifically what GPOR has had. Yes, agreed there can be a case where there has been no other affiliation, one answer is that both parties are comfortable with the opportunity set each brings along. But to look deep into this we should look at the margins (SG&A, etc.). Gulfport’s margins have been in most cases ahead of the industry average if not leading (partially because of the high LLS premium cushion). The same argument holds true for Wexford Capital drilling, etc. companies working at GPOR’s Louisiana assets. Think drilling, completion, etc. are not highly differentiated/technology oriented jobs. So till the time margins are fine, one can think of such a mutually beneficial business setting. Netherland Sewell, industry leading third party reserve analysis firm is the evaluator for GPOR’s Louisiana assets.

Largest shareholder and Chairman of Board:Charles Davidson has private ownership of the shares. Wexford Capital does not own any shares of Gulfport directly.• March 5th 2012: Charles Davidson had 6.431618 shares or 11.56% through CD holding company. Information set forth below is on the basis of 55,621,371 shares of common stock issued and outstanding, as reported in the Company’s Form 10K filed February 27, 2012.http://www.sec.gov/Archives/edgar/data/874499/000104846212000011/formsc13g.htm• From Gulfport’s 8k: Diamondback, Windsor Permian and DB Holdings are entities controlled by Wexford Capital LP (“Wexford”). Charles E. Davidson, the Chairman and Chief Investment Officer of Wexford, beneficially owned approximately 9.5% of Gulfport’s outstanding common stock as of March 13, 2012. Mike Liddell, Gulfport’s Chairman of the Board and a director of Gulfport, currently serves as the operating member and chairman of Windsor Permian and has an interest in DB Holdings.

Mike Liddell, who is the chairman of the board co-founded DLB Oil & Gas back in 1990’s along with Charles Davidson. Mike, Mark and Charles together owned 75% of the company and sold the company to $150M to Chesapeake back in 1997. That is quite impressive, giving some emphasis to the fact that they know how to run an oil and gas business. Also, helps understand that they know each other for over 20 years now. Mike Liddell was GPOR’s CEO till 2005.

PE ownership and JV’s example in oil and gas – CRZO:Again to mention the point of PE ownership in O&G firm assets, there are numerous examples but the most recent ones and one of the best and conservative management teams in the industry CRZO comes to mind. It is a company with assets in Marcellus, Utica, Eagleford. If we look through their presentation page 11, we can find the evidence of all JV’s. JV’s with Avista Capital appear multiple times. JV in Utica is more unique with the fact that Avista is 90% owner yet CRZO is the operator. Moreover, Avista’s Steve Webster is the Chairman of Board, owns more than 5% of company’s shares, and is the co-founder/co-managing partner/co-CEO at Avista Capital. All I know of is that CRZO is a very good company with excellent management team and good asset base. CRZO has quite a lot of leverage, and gas weighted assets, which is unlike GPOR.http://www.crzo.net/uploads/3-26-12%20Carrizo%20Howard%20Weil.pdfThe fact that GPOR discloses all the relationships in public domain in all the filings is what is required by law and it is abiding by it (unless someone has some “specific” case/scenario/example to point out).

Annual Meeting: Annual meeting of stockholders is on Jun 7 2012 in Oklahama City, OK. We can find this information in the proxies. All shareholders can go there or send their votes by mail. Below is the link to the proxy also available on GPOR’s website.http://www.sec.gov/Archives/edgar/data/874499/000119312512196642/d337122ddef14a.htm

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